Day traders are very different from traditional investors. Both of them focus on similar financial vehicles, namely stocks, but that’s where the similarities end. Traditional investing teaches people to hold onto stocks to build their wealth and assets. Day trading is focused on making short-term profits on stocks. To be a true day trader, you must sell all of your shares at the end of the day. It doesn’t matter if you lose or gain money. All of the shares must be sold. Due to this limitation, many day traders also use swing trading strategies to reduce their overall loss. Becoming a day trader is fairly easy because you can do it from home, but being successful can be quite a challenge.
While it might seem like a bad idea to just hold shares for a single day, the benefit of this strategy is that you won’t suffer from major changes that happen from day to day. For example, imagine that you bought a stock at $10 and it skyrockets to $100 at the end of the day. Since you want to see how high the stock can go, you decide to hold it. After the market closes, there’s suddenly a news report showing that the CEO of the company was using illegal business tactics to increase the company’s profits. The business’s value will probably drop significantly by the time that you can sell the shares. Day trading avoids these intense changes because your account is closed at the end of the day.
At the same time, true day trading can be incredibly difficult. Most investors decrease their losses by holding onto stocks. Nearly every business goes up and down in value, and only holding stocks for a single day keeps you from experiencing major increases. You also have to sell shares even if they are worth less by the end of the day, which can be hard for new day traders.
The mechanics of day trading are the same as regular trading and investing. Find a company that you want to invest in, buy a specific number of shares and then hold them until you are ready to sell. Most day traders make several trades every hour. In fact, the best ones will buy hundreds of shares, wait a few minutes and then sell them as soon as they increase for small, but consistent, profits.
You Can Trade Online
You can easily buy and trade stocks online. Most websites and programs have up-to-the-minute information that allows you to effectively buy and trade at home. Be sure to look for companies that have low trading prices. You will have to pay to trade shares. Not only does this reduce your profit, but the cost can become a major problem if your trade doesn’t yield much money. For example, if the trading price is $7 and the trade is only worth $5, then you’re losing money. Day traders need companies with low trading values, and they often buy and sell many shares to overcome these issues.
Technology is also important. You need a good computer that can quickly process any market charts or trading decisions. If your computer moves slowly, then a good trade might turn bad by the time it’s processed. At the same time, you don’t need a massively powerful computer. A dual-core or quad-core processor and good battery, if you’re using a laptop, should be enough.
Further Distinctions Between Day Trading & Other Types of Trading
Another difference between day trading and traditional investing is the type of companies that you will invest in. Traditional investors look for companies that are strong and consistent. While everyone wants shares that skyrocket and rapidly increase in value, traditional investors prefer companies that will consistently improve. This ensures that they can count on the stock several years from now.
Day traders should look for inconsistent companies that rapidly change in value. Companies that have shares that go from $15 to $30 within an hour or two are perfect for day traders. In fact, most day traders will only hold the shares for several minutes before trading them. This allows you to take advantage of the lows and highs, but you have to make sure that you trade when the price is high. Failing to trade at the right moment can lead to massive losses.
Best Days for Day Trading
Christmas is the best time for day traders because stocks will rapidly fluctuate since companies are increasing their manufacturing, hiring and overall sales. You should learn about how the market changes throughout the year to maximize your profits. Right after Christmas the market tends to slow, but it gets better during March and April. June and July are also great for day traders, but the other months can be hard since stocks tend to decrease or stay flat.
The best day traders make the most money by buying lots of stocks, typically hundreds or thousands, and selling them as soon as there is a profit. While this might be good when you have the money, it’s best to make small investments initially until you gain some experience and better understand the market. Don’t sink thousands of dollars into investing during your first week. This can lead to massive losses and even bankruptcy.
A similar type of investing strategy is swing trading. Much like day trading, these investors focus on making profits in a short period of time. The difference is that swing traders will often wait a few days or even a week before selling their shares. This allows you to take advantage of long spikes in the market, but it also opens you up to vulnerabilities if the market changes throughout the day. While there are a number of true day traders, most investors mix these strategies to avoid losses and increase profits.